Key Takeaways
- Equity recapitalizations allow owners to sell 51-80% of equity while retaining a "second bite" stake.
- Dividend recapitalizations provide tax-free liquidity because loan proceeds are not taxable income.
- The "second bite" can equal or exceed the first when the new partner successfully scales the business.
- IRC §302 governs the tax treatment of stock redemptions — they must qualify as substantially disproportionate for capital gain treatment.
- IRC §721 allows tax-free contributions of property to partnerships, potentially deferring gain in recapitalization structures.
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Test Your Knowledge
1.Why are dividend recapitalization proceeds not taxable to the owner?
2.In the portfolio recapitalization scenario, what was the investor's total combined value (cash + retained equity)?
3.What IRC section governs tax-free contributions of property to partnerships?